Why lenders love jumbo mortgages

AnyaMartin

Jumbo-mortgage business continues to be a bright spot for lenders, even as mortgage activity overall slumps.

The total number of mortgage applications from home buyers was down in May compared with a year ago, according to the Mortgage Bankers Association. The drop comes amid rising home prices, an abundance of cash-only buyers and generally tight credit standards, according to the National Association of Realtors. But mortgage activity remained relatively stable for loan amounts at the jumbo level—above $417,000 in most markets and more than $625,500 in some high-price areas.

The top reasons for the health of jumbo lending include lenders’ hunger for wealthy clients, luxury-home buyers cashing in on new jumbo products, and historically low interest rates and credit availability for high-end borrowers, says Guy Cecala, publisher of Inside Mortgage Finance. For the week ending June 13, the average interest rate was 4.29% for the 30-year fixed jumbo loan, according to mortgage-information provider HSH.com.

“There’s more competition, more affordable rates and the most flexible underwriting,” he adds. “Arguably, this is one of the best times in history to be shopping for a jumbo mortgage.”

In May, purchase applications for loans between $417,001 and $625,000 were up 2.5% compared with May 2013, and applications for loans greater than $729,000 saw a 3% drop, according to the MBA. That is compared with year-to-year decreases of 18.8% for loans of $150,000 or under, and 19.4% for loans between $300,001 and $417,000.

Lenders hope home buyers can fill a gap caused by a sharp drop in refinancing. Most eligible borrowers have already refinanced given low rates last year, says Joel Kan, MBA’s director of economic forecasting. “A lot is driven by profitability since lenders are keeping jumbo mortgages on their balance sheets,” he adds. In other words, lenders see jumbo mortgages as a safe investment to hold, versus selling them to mortgage-backed securities.

In the first quarter of 2014, jumbos accounted for 38% of Bank of America’s overall mortgage lending, including home purchases and refinances, compared with 23% a year ago. However, that percentage corresponds to a much lower total dollar amount, down from $23.9 billion in originations to just $8.4 billion in that same three-month period a year earlier. That decline can be attributed to the loss of refinance business, according to Bank of America.

Every lender that First Capital Group works with offers a jumbo product, a difference from two years ago, says Mathew Carson, vice president of the San Francisco mortgage-brokerage firm. “Lenders want jumbo borrowers,” he adds. “They see a jumbo mortgage as an entry point to sell them other financial services.”

More factors driving jumbo-loan growth include a housing market rebounding quickly on the upper end and greater consumer confidence among high-income home buyers, Mr. Cecala says. “Higher-end borrowers have recovered faster and stronger than lower-income Americans from the recession,” he adds.

For example, median single-family home prices have soared in a number of markets, especially in California. The median price rose to $679,800 in San Francisco in the first quarter of 2014, a 14.5% increase from the same quarter in 2013, according to the Realtors association.

The average amount on a home-purchase loan application was $276,300 on June 6, the MBA says. That was down slightly from $280,500 for the weeks ending on April 18 and May 9, the highest since the survey started in January 1990.

Here are some issues for jumbo borrowers to consider when applying for a loan:

Lower down payments: In the competition for jumbo borrowers, some lenders are relaxing the 20% down-payment requirement that was pretty much standard last year. For example, Bank of America introduced an 85% loan-to-value product in the fall, and Navy Federal Credit Union has a 0% down payment portfolio loan.

More lender and loan choices: In an effort to be competitive with big lenders, small banks and credit unions are rolling out new jumbo loans with aggressive pricing and features, such as adjustable-rate mortgages with longer fixed-rate periods and post-purchase loans where the buyer pays cash up front and then applies for jumbo financing.

Tight borrower standards: Lender enthusiasm for jumbo mortgages, however, remains tied to strong underwriting standards, Mr. Carson says. Borrowers have got to have a good credit score, ideally in the high 700s, and sufficient reserves and income.

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